Under the Internal Revenue Code an individual may avoid paying income tax on up to $250,000.00 of gain on the sale of a principal residence. If a husband and wife occupy a residence jointly, they are able to avoid tax on up to $500,000.00 of gain on the sale, even if the home was only in the name of one spouse. One of the requirements for this exclusion though is that the property sold must have been used as the principal residence of the taxpayer for 2 of the 5 years before the sale.
The 2 of 5 year rule might create some concern, if the couple separates and one spouse moves out for more than 3 years before the sale. This is not an unusual situation, and in fact a divorce lawyer will frequently recommend such an arrangement. This can allow minor children to remain in their home with one parent until they are older. Then once the children meet the specified age, the house may be sold, and both parties may receive their share of the equity in the home.
Fortunately this does not force the spouse, who moves out, to pay tax on his or her share of the gain. The law allows an individual, who moves out of a home under a divorce or separation agreement, to still treat the home as a principal residence during the period he or she continues to own the residence.
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